Investments, tenth edition

 The Term Structure 

of Interest Rates 

 CHAPTER FIFTEEN 

     15.1 

The Yield  Curve 

  Figure 14.1 demonstrated that bonds of different maturities typically sell at different yields 

to maturity. When these bond prices and yields were compiled, long-term bonds sold at 

higher yields than short-term bonds. Practitioners commonly summarize the relation-

ship between yield and maturity graphically in a    yield  curve  ,  which is a plot of yield to 

 maturity as a function of time to maturity. The yield curve is one of the key concerns of 

fixed-income investors. It is central to bond valuation and, as well, allows investors to 

gauge their expectations for future interest rates against those of the market. Such a com-

parison is often the starting point in the formulation of a fixed-income portfolio strategy. 

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P A R T   I V

 Fixed-Income 

Securities

 In 2012, the yield curve was rising, with long-term bonds offering yields higher than 

those of short-term bonds. But the relationship between yield and maturity can vary 

widely.  Figure  15.1  illustrates yield curves of several different shapes. Panel A is the 

almost-flat curve of early 2006. Panel B is a more typical upward-sloping curve from 

2012. Panel C is a downward-sloping or “inverted” curve, and panel D is hump-shaped, 

first rising and then falling.